New Labour Codes & Accounting Implications

The ICAI (Accounting Standards Board) has released a set of FAQs to address the significant accounting changes triggered by the transition to the New Labour Codes. With an effective date of November 21, 2025, businesses must evaluate the impact on their financial statements immediately.

"50% Wage Rule" & Gratuity Impact

One of the most critical shifts is the new definition of "Wages," which must now be at least 50% of total remuneration.

·       Liability Increase: Gratuity is now calculated on this higher wage base, leading to an increase in long-term obligations.

·       New Eligibility: Fixed-term/contract employees are now entitled to gratuity after just one year of service (down from five years).

·       Permanent Employees: The five-year continuous service requirement for permanent staff remains unchanged.

Accounting Treatment (AS 15 & Ind AS 19)

The ICAI classifies these changes as Plan Amendments, which must be accounted for as Past Service Costs.

·       Ind AS 19: Entities must recognize the entire increase as an expense in the Statement of Profit and Loss immediately.

·       AS 15 (Indian GAAP): 

o   Vested benefits are recognized immediately.

o   Unvested benefits are amortized on a straight-line basis over the remaining vesting period.

·       Leave Obligations: Any increase in leave liability must be recognized as an expense immediately under both frameworks.

Reporting & Disclosure Timelines

•  Interim Reporting: Listed entities must recognize the impact in their financial results for the period ending December 31, 2025
• Non-Adjusting Event: For periods ending before November 21, 2025 (e.g., Sept 30, 2025), the change is a non-adjusting event. However, material impacts must be disclosed in the notes.
• Exceptional Items: Depending on materiality and incidence, entities may evaluate presenting these costs as Exceptional Items in the P&L.

Taxation & Deferred Tax Assets (DTA)

·     - Tax Deductions: Remain based on actual payment (contribution to funds or payment to employees).

·      - DTA Recognition: The difference between accounting expense and tax deduction creates a timing difference, allowing for the recognition of Deferred Tax Assets, subject to prudence norms.

Disclaimer: This update is for informational purposes. Please read ICAI FAQ and consult with your technical advisor for impact assessments specific to your organization.